Analysis of a losing trade

PEM Trade

You can be lucky. A rakeover offer @ $0.35 has meant that this losing trade may end up making a very small positive return 

 

 Perilya Limited (PEM) is a base metals producer and explorer with exploration and production mainly in Australia and Dominican Republic.

 

I hold 30,000 shares on PEM purchased @ $0.30. There has been a solid fall in share price in the last 6 months.  This is an example of Denis Gartman's trading rule:" Do not add to a losing trade"! The broker analysis on Perilya is relatively positive with a valuation of $0.65 although this stock does not pay a dividend and is 80% held by the top 20 shareholders with over 50% being held by a Chinese company: Zhongjin Lingnan Mining . Shares are not that liquid and tend to move on low volumes interspersed with large parcel trades.

 

This is an interesting trading proposition. I have not exited the trade as the value is relatively small and not material to my trading returns for the year. I can not see a short term catalyst for a recovery in the share price.The 2012 result was ahead of the broker estimates. Minor changes have been made to earnings estimates. UBS maintains a Buy based on valuation. The price target is 35c.

 

I intend to continue holding these shares.  The business remains sound and commodities prices will be the governing catalyst for a price reversal. This may be some time in coming. What is important is to limit the risk of increasing losses by adding to this losing position.  The loss of 100% of the value of these share is unlikely but even that occurrence would not be material to my trading results. However the temptation to buy more shares as they are now cheap is resisted. Never add to a losing position. 

 

 

 

 

 

 

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These articles show my past trading performance. This is a review of each years activity and is not a complete statement of my financial position.